Value Nation: Say Goodbye to Excess

Jan. 16, 2008— -- It wasn't all that long ago that Americans lined up around the block to buy a $600 i-Phone. Hummers crowded the highway. Consumers in this country were spending more than they earned.

How times have changed.

In just a matter of months, consumers went from a negative savings rate to saving an estimated 5 percent of their incomes. It may not sound huge, but in economic terms, that's a dramatic change in behavior.

"Consumers have been spending beyond their income for 25 years," said Mark Zandi, chief economist at Moody's Economy.com. "They could do it, because they could borrow and also because their nest eggs were getting bigger, because of rising stock and house prices. That's over."

The third quarter of 2008 saw the worst drop in consumer spending since 1980. And consumer confidence is abysmal. This week's ABC Consumer Comfort Index finds 94 percent of Americans say the economy is in bad shape, matching the record high in 23 years of weekly polls. Only 26 percent of Americans polled call this a good time to spend money.

And it's not just those who are unemployed who aren't spending. It's people with steady jobs too.

Chris and Beth Gilbert have an old stone home on a treelined street in Doylestown, Pa. They both have stable jobs working for their family car dealership business. But even they are cutting back.

"We are petrified. Absolutely petrified with what is going to happen," said Beth Gilbert.

"We are both in the car business, and the prediction for the car business is not getting any better," Chris Gilbert said.

The Gilberts have made up a new family budget, with fewer pizza nights, and no annual ski trip. The frugality at every income level sets off a brutal chain: The cutback in spending is killing retailers, who in turn cut orders, forcing their suppliers to cut jobs, sinking the economy deeper into a recession.

What's the fix? Businesses are focusing on where consumers will spend, lowering prices until consumer confidence grows. But experts say that won't happen without massive government help.

Stores Offer Value Deals to Encourage Spending

At Wal-Mart's first store in Rogers, Ark., chief marketing officer Steve Quinn told ABC News that they're pushing "value" bang for the buck purchases like never before.

"In our case, we are not going against it, we are going with it," Quinn said. "What we promise people is that they will save money if they shop at Wal-Mart."

Even Wal-Mart isn't immune to the spending downturn. Sales in December were lower than projected, but it's one of the few big-box stores still posting profits, in part because it has figured out what consumers are still willing to spend their hard-earned paychecks on.

Take electronics. Families are "cocooning," Quinn says, spending more time at home, and many are investing in home entertainment.

"The Nintendo Wii -- one of the things we're focusing on is how families can play these kinds of games together," Quinn said. "It's relatively inexpensive, relative to going out to a movie."

But cheap TVs and drastic sales won't be enough for the economy to turn around

"If you lose faith, then you're in recession. And if you panic, you're in depression," Zandi said. "We're somewhere between recession and depression at this point, and that's why it's so important for policymakers to act very aggressively, boldly, consistently to shore up confidence."

The Obama administration is pushing a $1,000 tax credit, and packages that include job creation and help for homeowners. But economists say consumers need to know their jobs are secure, their homes are safe from foreclosure and that they can get a loan before they will start taking advantage of the bargains around them.

"They can go into a department store, and they see the bargain of a lifetime, and they say, 'Oh, my gosh. I'm going to take that opportunity,'" Zandi said.

Economists and business leaders agree that American consumers will spend again, but they might never return to their old, excessive spending habits.

"I think they are learning what they can save on their own. [Families] save hundreds and hundreds of dollars. It's not so hard to brew a great cup of coffee at home. I don't know that if the economy comes back that people are going to go very quickly back to their old habits."